I'm re-reading through some investment books right now and thought I'd throw one them out here with my thoughts and questions. Investing and the Irrational Mind: Rethink Risk, Outwit Optimism, and...
I'm re-reading through some investment books right now and thought I'd throw one them out here with my thoughts and questions.
Investing and the Irrational Mind: Rethink Risk, Outwit Optimism, and Seize Opportunities Others Miss
by Robert Koppel
The title of this one intrigued me. Author Robert Koppel is a former investor/trader on the Chicago Mercantile Exchange. He covers a lot of research on what psychologists have discovered about biases and irrational thinking, particularly as it relates to investing and trading. He's also interviewed many other investors and offers his own observations from extensive experience.
He goes back and forth between having and investment plan and using intuition, which as it turns out are both tactics investors have used. I think the valuable part of this book is the way he ties in research by Nobel Prize winner Daniel Kahneman and others on biases to what happens when we make good and not so good decisions in finance. An example of one of those common pitfalls:
We also experience a reflection effect whereby individuals make irrational choices to enter or exit an investment based on a subjective reference point determined by whether they have already experienced a gain or a loss. An example of this would be someone waiting for a “breakeven” price before exiting from an investment that is performing poorly rather than looking at the market objectively, without reference to the purchase price.
The book isn't so much an investment strategy but rather a good overview of what's involved in the process. As someone who has handled his own investments for years, I found that Koppel's book is realistic and practical, especially for those of us who've had to make those hard decisions on buying and selling, either for the long term or short term.
My own particular problem is watching things too closely and losing a sense of longer term movement. Investing And The Irrational Mind is a great tool for giving me pause and reflecting on the mistakes I've fallen into over the years.
Even as basic a rule as "cut your losses short" is hard to follow and really give me pause to think about issues I've held onto for too long as well as others that went on to go up and away. I've love to hear your thoughts.6 votes